Musings on Economics, Finance, and Life

The 50 Most Important Economic Theories

What are the 50 most important economic theories of the last century? That’s the question a publisher recently asked me to ponder for a book they are developing.

I’ve noodled on this over the past week and have some initial ideas. But I would be remiss if I didn’t solicit suggestions from my insightful readers.

So, what do you think have been the most important economic theories over the past century?

To spark your thinking, here are some very preliminary ideas, albeit without much respect for the publisher’s century limitation. (Apologies for the higher-than-usual amount of jargon and economic short-hand.)

I think the items in the first list are more likely to make the cut than those in the second list. There is otherwise no importance to the ranking.

I could go on, but you get the idea. As the list illustrates, there are nuances about what constitutes a theory — some try to describe how the world works, and others try to describe how it should work. And, of course, they vary widely in how well they accomplish those goals. There are certainly economic theories that are wrong, but nonetheless deserve to be on the list.

As the list may suggest, I am a mainstream economist with a U.S. focus, so my first round of brainstorming undoubtedly overlooks some worthy non-U.S. theories or less orthodox theories. (And I probably overlooked some mainstream ones too!)

Yep, 1 & 2 are the big deal in the history of 20th century economic thought — and are directly related.

Yet Hayek would argue that #3 and #4 are things that separates the men from the boys when it comes to understanding what significance #1 and #2 have for the science of economics.

The problem with socialism is that it cannot price production goods, and the big failure of “neoclassical” economics is the failure to understand that math “modeling” is not what is truly significant in understanding the driving force and explanatory cause illuminated by economic science — which is entrepreneurial learning in the context of changing relative prices and local conditions.

And the fatal problem with “mainsteam” macroeconomics is that it fails to address the bedrock causal process of the economy, the very stuff of money, interest and production cycles — i.e. adaptive valuational choice across time involving non-permanent production processes that take more or less time and produce more or less output.

“Market socialism” was an invention of those in England who read or listened to Hayek in the 1930s, but who didn’t “get it” — i.e. they failed to get #3 and #4. Hayek’s students Abba Lerner and Oskar Lange were the king of these — and it is worth noting that Lerner’s mistakes were massively influential upon 20th century “mainstream” economics.

How about “secular stagnation” theory of the sort popularized by Hansen, Keynes, and some of the folks at the U. of Chicago?

Another good one is the massively influence work of Foster & Catchings which made “deficient demand” theory all the rage — and which popularize the fiscal and monetary policy prescription of public works programs and inflationary “stimulus” in the _1920s_ (Sen. Wagner, FDR, and Hoover were all on board in the _1920s_, years before Keynes every wrote a word on the topic.)

Another good idea. Perhaps two ideas, actually. One being the line of work that begins with the Problem of Social Cost and the distribution of property rights. The other that begins with the Theory of the Firm and leads through Williamson to the contemporary theories of the line between firms and markets. Thanks.

That’s an important one. I had it as #15 on the second list, but it really deserves to be on the first. As noted, I’ll combine this will Stigler et al. and the economic theory of regulation, which treads some similar ground.

I think I would lump a couple of categories together under “Rules versus Discretion for Monetary Policy”. This groups together dynamic inconsistency, central bank independence, expectations augmented Phillips curve, and to a large extent Taylor Rules. Since 1979, I think this has guided the behavior of most central banks.

I would also think that there should be some category that includes the work of Gary Becker, Kevin Murphy, and Sherwin Rosen. I think human capital is a very important concept that appears to be taken for granted.

Also, the market for superstars and CE0 compensation are things that are topical now, but I am not sure that they should be classified as top 50 economic ideas.

I think I would lump a coupe of categories into one and call it “Rules versus Discretion and the Role of Central Banks.” This would put together dynamic consistency, expectations augmented Phillips Curve, central bank independence and Taylor Rules. Since the late 1970s, this idea has guided the behavior of most central banks.

I also think there should be some room for the work of Gary Becker and Sherwin Rosen. The idea of human capital pioneered by Becker and Mincer has been an important innovation to both labor and growth.

Lastly, more topical, should there be room for the Market for Superstars and CEO Compensation?

Thanks D. That is indeed one of the things I tried. Some Nobel-worthy ideas don’t really translate into this project (e.g., advances in econometric technique), but it did remind me of some important ones.

How about the Miller Modigliani Theorem? Essentially, Firm Value cannot be enhanced via capital structuring, absent the role of taxes. The value of a leveraged firm and the value of an unleveraged firm should be the same.

Thanks Javier, M&M is a good one. The publisher told me today that they wanted to pass on some of the financial suggestions I made (including Efficient Markets, CAPM, and Portfolio theory) so that they have more room for classic theories (I had omitted Comparative Advantage and Marxism, for example, given their age). So I am afraid there won’t be too much finance. Oh well. Maybe that can be another list.

One of my favorite theories is the Theory of Yes Men – essentially having proved that butt kissing in an organization costs that organization. This applies to all organizations – especially government. I also think we need to acknowledge the Peter Principle as a corollary to this theory.

Those are fun thoughts. I’ve always been impressed with organizations that create an anti-Yes man culture. I’m not sure, though, that I would characterize the Peter Principle (does the name bother you?) as a corollary. Maybe a cousin. After all, the PP starts with a legitimate vision of advancement (let’s promote the good people), while pure Yes Man ism seems much less legitimate. Thanks, Donald

The name does not bother me. But adding to your list is the always popular Conspiracy Theory. Many economic decisions- or lack thereof -, and perhaps personal choices are based upon it, or at a minimum influenced by it. One could even say the Goldmann Sachs phenomenon. Much in vogue, and one that cannot be dismissed are the Elliot Wave and Kondratieff Waves/Cycles. Equally more pragmatic are the “principles”, that Harry Dent jr. espouses, and has for years, which are based upon demographics, spending patterns, and technological innovation. In fact, if any sets of theories explain the world economic cycles, his certainly are the most logical, and more important, they are not two-dimensional, and even more important, they are easily explainable. Which gets us to the KISS principle – theory, or fact??. Food for thought.

Althought they wouldn’t stack too neatly, organizing this list in a serial fashion might be helpful.

And while I gather the list is not in order of “importance,” I would conjecture that Minsky and some variant of adaptive expectations ought to be somewhere in the single digits. How many Minsky Moments does an economist need to see in a lifetime to recognize the value of a particular framework?

I am looking for a theory called Economic Burden Theory in Health Care. I am working on my dissertation on economic impact of small business ower respective to the implementation of one states manadtory health care plan. Do you have any suggestions?

Thank you for the sensible critique. Me & my neighbour were preparing to do many research about that. We got a excellent book on that matter from our regional library and most books where not as influensive as your information. I am really glad to see such information that I was searching for a long time.That created extremely glad Smile

Thank you, Donald. I was looking for economic theories because I had a feeling that the Western system of Fractional Reserve Banking would be completely upset by any form of Islamic banking or finance.

I really doubt whether Western economists have performed much in the way of empirical studies of possible economic systems without interest probably because they are not well-developed internationally.

Whilst it could be that the West would see such alternative theories as a threat, it is equally possible that they are ignored as utterly non-viable.

To put it another way, a modern mixed economy could tax with an income tax, a capital gains tax or a consumption tax (Goods and Services Tax in Australia) or some combination of these (as we do in Australia). But the framework is basically the same with minor variations.

Would I make sense by asking how many different ‘economic frameworks’ could there be? Barter, laissez-faire, banditry, centralised government?

In what way would you define them? Is it likely that some ivory tower academic will come up with a new ‘economic framework’ that nobody has thought of yet?

Sorry for tagging on here but I’m looking for an economic theory and if anyone would know, it would be you guys. I need an economic theory about how organisations weigh up two competing needs to arrive at a course of action – an outcome that produces the ‘least overall harm’ to the organistion. Does such a theory exist?

I don’t know that there is a fully-fledged economic theory but there is certainly a moral principle, or ethical standard, of “least harm” which has been called the Utilitarian Approach. Some ethicists emphasize that an ethical action is “the one that provides the most good or does the least harm”.

Economically, the principle has been applied to making a determination whether to eat meat or be a vegetarian. Use Google to search on “least harm” and you will find a comparison, or cost—benefit analysis, for the choice.

Good day sir, I’m currently taking up bachelor of science in economics here at the university of the Philippines, and I’m wondering if in every economic theories, are there also economic models?? or, economic model should be studied separate from the theorems?? because, everytime our professor would ask about examples of econ. theorems, and we can’t answer, she would give an econ. model, and vice versa.

Thank you for spending your time and effort in answering my question. Have a good day.

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